The Hambantota port deal
Posted on January 10th, 2017
Mahinda Rajapaksa Former President of Sri Lanka
Since the future of the Hambantota port is now under discussion, I wish to explain to the public, my position on this matter. The loans taken for the construction of this harbour were 450 million USD for the first phase, 70 million USD for the bunkering facility and 802 million USD for the second phase bringing the total to around 1,322 million USD. When complete the harbour would have four terminals and 12 berths. This was meant to be a free port covering an area of 2,000 hectares where goods could be manufactured or value added and shipped overseas. All the necessary feasibility studies were done before these loans were taken and the annual interest plus capital repayments would amount to about 111 million USD. My government had planned to raise that money through the Ports Authority itself.
The first phase of the Hambantota harbour became partially operational in 2011. The transhipment of vehicles began in 2012 with 70% of the vehicles coming into Hambantota being transhipped to other countries. In 2014, 335 vessels called at the Hambantota harbour with 295 in 2015. The port made an operating profit of Rs. 900 million in 2014 and Rs 1.2 billion in 2015. These are investments that last centuries and a new harbour cannot be expected to produce large profits in the first few years. Our plan was to break even within ten years.
My government had signed a Supply Operate and Transfer (SOT) management contract with a joint venture between China Harbour Co and China Merchant Co to supply equipment such as cranes and operate the Hambantota container terminal for 40 years. The Ports Authority was to receive a rental of 35,000 USD per hectare per year for the 56 hectares in the container terminal (a total of 1.96 million USD per year), a royalty of 2.5 USD on every container loaded or unloaded, warfrage of 30 USD per container for cargo coming into Sri Lanka and all other usual harbour charges for navigation, piloting, tonnage, etc. Other than the container terminal, all other terminals in the harbour and the 2,000 hectare industrial zone was to be controlled by the Ports Authority and they would have derived the income from the cargo of the free port passing through their terminals.
The new government made some unwise decisions. Firstly, they disregard the management contract for the Hambantota container terminal entered into by my government with China Harbour Co and China Merchant Co. Secondly, the Ports Authority had developed the Colombo East container terminal and upon its completion by 2016, this terminal would have produced a revenue of more than 100 million USD a year which the Ports Authority had earmarked to pay off the Hambantota loan until the latter generated sufficient income. The yahapalana government halted the Colombo East terminal development. Thirdly, by the end of 2014, my government had signed agreements with several foreign and local companies to lease out about 80 hectares in the Hambantota port industrial zone at the minimum rate of 50,000 USD per year per hectare with minimum guaranteed volumes of cargo and minimum guaranteed royalties. All those agreements were disregarded by the new government.
Then the government said the Hambantota port was a white elephant and that it had to be privatised to raise the money to pay off the loans taken to build it. They called for bids, not just for harbour operations but for the rights of the landlord over the entire 2,000 hectare free port so that whoever takes the long lease will operate the entire harbour and have complete control over the industrial zone as well. The two companies China Harbour Co and China Merchant Co which made a joint proposal to lease out the Hambantota container terminal for 40 years during my government are the same companies that have made rival bids to lease the entire free port under the present government.
A framework agreement has been signed by the govt. with China Merchant Co to lease out the entire free port for 99 years for a payment of 1.08 billion USD on a 80%-20% equity sharing basis. No other income will accrue to the Ports Authority for 15 years, after which they will receive dividends for their 20% stake only if dividends are declared. The lease will be extendable for another 99 years and a 44 hectare artificial island outside the port has been included in the deal. There is provision for the construction of another 20+ berths and the rights over these too have been given to the lessee. The amount of the lease seems to have been based only on the construction cost of the port without an accredited international valuation reflecting the strategic location value of the port, the value of the 99 year period, its 2,000 hectare land, the oil tank farm and the value of its present commercial operations.
This bid has been accepted in a situation where the other company China Harbour Co. had (according to information available to us) put in a much more favourable bid to lease the free port on a 65-35 equity sharing basis for 50 years with an upfront payment of 750 million USD plus the payment of all the charges they had earlier agreed to with regard to the container terminal management contract. The government has chosen the least favourable bid despite (according to information available to us) the Ports Authority having recommended the other bidder. Details of how the two proposals were evaluated have not been disclosed.
A 99 year lease impinges on Sri Lanka’s sovereign rights because a foreign company will enjoy the rights of the landlord over the 2,000 hectare free port while operating the entire harbour as well. This is not an issue with China or with foreign investors. It is about getting the best deal for Sri Lanka. The agreement that my government negotiated with both China Harbour Co and China Merchant Co to manage the Hambantota container terminal for 40 years is the best deal yet. The bid made by China Harbour Co for a 50 year lease is obviously more favourable than the bid made by the other company. As a matter of principle, I am against the leasing of the entire harbour for 99 years and giving the rights of the landlord over the industrial zone to a foreign private company. The industrial zone and the harbour should be controlled by the Ports Authority while harbour operations may be given on management contracts to the private sector. For example, the Colombo port is run by the Ports Authority and two private operators. The Ports Authority has full control over the Colombo harbour as well as equity in the two privately run terminals. I believe this should be the approach to the Hambantota port as well.
Apart from the entire Hambantota free port, the government has decided to lease a further 15,000 acres outside the free port to a foreign company for 99 years. In a situation where even the 2,000 hectares within the free port have not been utilised yet, on what grounds can we justify the leasing of another 15,000 acres to a foreign company? The total land area of all the Board of Investment economic zones in the country at present put together do not amount to 2,000 hectares. A 15,000 acre zone in Hambantota will be disproportionate to our country’s economy. Furthermore, the disruption caused to the people of the area will be immense if 15,000 acres of land were to be acquired for this purpose. The government should fill the free port with investments first before opening more zones. Furthermore the government should have supervision over the kind of factories, that will be opened in these industrial zones, the fuel they use and the waste they produce. My government agreed only to the use of LNG gas, even though some potential investors wanted to use coal.
This is not an issue that can be resolved by baton-charging or tear gassing protestors or having them assaulted by thugs and remanded. There are real issues relating to the financial benefits that will accrue to the country from this deal, and issues of control and sovereignty over the free port and possible environmental issues that need to be addressed.
Former President of Sri Lanka